India's NBFC sector appears to be entering a more durable phase of recovery, with 1QFY27 performance reinforcing improvement across loan growth, asset quality and profitability. According to reports from Motilal Oswal Financial Services Limited (MOFSL), the current recovery is being driven by multiple operating levers moving in tandem—healthy credit demand, moderating credit costs, resilient margins and improving operating leverage. Unlike earlier cycles where earnings were supported largely by provision reversals, the current recovery is being sustained by fundamental improvements across the sector. The recovery is also broadening across vehicle finance, diversified lending, housing finance and microfinance, strengthening the outlook for sector-wide earnings momentum. Looking ahead, the trajectory of interest rates, inflation, monsoon conditions and regulatory changes will determine the pace of the recovery, with a sustained moderation in funding costs potentially extending the earnings upgrade cycle further.
Asset quality has emerged as the most significant positive surprise after nearly two years of stress across microfinance, unsecured lending and certain retail portfolios. As reported by MOFSL, collection efficiencies have improved, and fresh slippages have moderated. Tighter underwriting standards, stronger collection infrastructure, greater use of analytics and a greater focus on secured lending have contributed to faster-than-anticipated normalisation in credit costs. Microfinance and micro-LAP, which endured some of the sharpest stress, are now showing early signs of cyclical stabilisation with a gradual recovery in disbursements alongside lower credit costs. A gradual recovery in disbursements, alongside lower credit costs, could provide meaningful operating leverage for lenders with exposure to these segments.
Loan growth remains healthy across secured and select unsecured segments, supported by rising formalisation of credit, improving consumer balance sheets and sustained demand from housing, vehicles and MSMEs. According to MOFSL, vehicle financiers continue to benefit from healthy underlying auto volumes and replacement demand, while HFCs are seeing steady disbursements across affordable and mid-income housing. Diversified lenders are witnessing improving traction across personal, business and secured loans, with greater emphasis on underwriting discipline supporting the sustainability of growth as competitive intensity remains elevated. However, growth is increasingly being calibrated towards profitability and risk-adjusted returns rather than market-share maximisation, with this greater emphasis on underwriting discipline supporting the sustainability of growth.
Margins have remained relatively resilient despite some moderation in lending yields, with the recent easing in bond yields providing incremental relief on borrowing costs. As reported by MOFSL, HFCs continue to face near-term NIM pressure amid intense competition and elevated incremental borrowing costs, but stable asset quality provides an important cushion to profitability. Investments in technology, digital sourcing, analytics and centralised operations are increasingly translating into greater cost efficiency, with better absorption of operating expenses allowing incremental growth to flow through more efficiently to earnings. As loan growth recovers, better absorption of operating expenses should allow incremental growth to flow through more efficiently to earnings, making operating leverage an increasingly important driver of return ratios.
L&T Finance receives a target price of ₹380, with MOFSL estimating approximately 25% loan book and 30% PAT CAGR over FY26-28E, with RoA/RoE improving to 2.6%/15% by FY28E. PNB Housing Finance is set at a target price of ₹1,390, with projections of 21% loan CAGR and 13% PAT CAGR over FY26-28E, achieving RoA/RoE of 2.3%/13% in FY28E. Both companies are positioned for sustained growth with strong fundamentals and multiple growth engines across their respective segments. L&T Finance remains well positioned for sustained growth, supported by strong retail disbursements, a granular loan mix and multiple growth engines across rural business finance, gold loans and personal loans. Its disciplined approach to growth, with selective moderation in disbursements to protect asset quality, underscores its focus on sustainable profitability. PNB Housing Finance remains well positioned for stronger growth, supported by increasing traction in the affordable and emerging housing segments, deeper customer penetration and the upcoming micro-housing finance rollout.
